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HomeMy WebLinkAbout09 MILLS ACT 03-17-97NO. 9 3-17-97 DATE: MARCH 17, 1997 Inter-Com TO: FROM' SUBJECT: WILLIAM A. HUSTON, CITY MANAGER COMMUNITY DEVELOPMENT DEPARTMENT THE MILLS ACT SUMMARY: The Mills Act is state legislatiott that provides for reduced property tares on an eligible historic property if the property owner agrees to maintain attd preserve the property for a mbtimum of ten years. In effect, the Mills Act serves as att incentive to owners to preserve their historic properties for the benefit of the entire community. Staff has presented reports on the Mills Act to the City's Cultural Resources Advisory Committee ott several occasions during the past several years. Recently, members of the Cultural Resources Advisory Committee requested that CiO' staff present a report to the City Council on the Mills Act. This report serves to provide the City Council with a general overview of the Mills Act and the potential intpacts of its implementation on the City of Tustin. Should the Council wish to implement a Mills Act program ht Tustin, it would be appropriate for the Council to provide direction regarding its implementation so that a resolution could be prepared for the Council's consideration at a future meeting. RECOMMENDATION .That the City Council provide direction to implementation of a Mills Act program in the staff regarding City of Tustin. the FISCAL IMPACT City Council direction regarding the Mills Act is being requested at this time; therefore, no impacts to the General Fund are anticipated. The fiscal impacts associated with the implementation of a Mills Act program are specifically related to the type of program implemented. For example, if all of the A, B, and C-rated residential properties outside of a redevelopment area participated in the program, it is estimated that the fiscal impact in the form of reduced property tax revenue could range from $11,500 to $47,000 annually. This is in addition to staff and City Attorney costs to develop and administer the program. City Council Report Mills Act March 17, 1997 Page 2 BACKGROUND AND DISCUSSION Adopted by the California Legislature in 1976, the Mills Act gives local governments the authority to grant property tax relief to owners of qualified historic properties, including owner-occupied single family residences and income producing properties. In exchange for this relief, the property owners must agree by contract (a Mills Act contract) to maintain the properties in accordance with specific historic preservation standards and conditions. In theory, the property tax reduction partially offsets the cost of historic rehabilitation and general maintenance of the property which may be conditioned as part of the Mills Act contract. The overall intent of the legislation is to provide an incentive for owners to preserve the community's historic resources. Only properties listed on an official federal, state, county, or city register, including the National Register of HisSoric Places, the California Register of Historical Resources, the California Register of Historical Landmarks, California Points of Historical Interest and local survey listings are eligible for Mills Act contracts. If approved by the Council, all properties listed on the City of Tustin Historical Resources Survey that are assessed property taxes would be potentially eligible to participate in the program. Mills Act Contract Provisions The minimum term of a Mills Act contract is ten years, with automatic yearly renewal thereafter, unless terminated by the property owner or the local government agency. If terminated, the contract would end at the end of the current ten year term. The property owner is assessed a penalty if the contract is canceled prior to the end of the ten year period. Once the Mills Act contract is signed, the property owner is required to maintain and preserve the property. Subject to the discretion of the local government, the contract may also provide for the ressoration or rehabilitation of the property according to the Secretary of the Interior's Standards for Rehabilitation. The requiremen5 for periodic exterior inspections of the property by City staff may also be incorporated into the contracs. When the Mills Act was first adopted, property owners were required to enter into 20 year contracts that required properties to be made available to limited public tours, among other access requirements. City Council Report Mills Act March 17, 1997 Page 3 However, amendments were approved in 1985 to eliminate these requirements. As a result, Mills Act programs have become more popular since 1985. Determination of Assessed Value The Mills Act reduces the owner's property tax bill by creating an alternative method for determining the assessed value of the qualified historic property. The property is assessed according to the "income" method. The assessed value is determined by calculating the projected income or theoretical rental value, less certain expenses, divided by a "capitalization rate." As shown in the hypothetical example in Attachment A, the property tax savings can be significant. When a property is owner-occupied, the determination of "income" is based on what the property could reasonably be expected to yield if rented. The income projection is based on comparable rents for similar properties in the area. In the case of income producing property, the income amount is based on rent actually received and on typical rents received for similar properties. The expenses to be deducted from income include those necessary for the maintenance and operation of the property. Typical expenses include: insurance, utilities, repairs, and management fees. Expenses that .are excluded include: debt service, property taxes, and depletion and interest on funds invested. The actual permitted amount of deductions for expenses is determined by the County Assessor's Office and is based on a different formula for each individual property. If dissatisfied with the County's determination, the property owner is able to negotiate with the County and appeal the determination. The capitalization rate is a number which is comprised of an interest component, historic property tax component, amortization component and a property taxes component. The County Assessor determines the capitalization rate. The interest component is determined annually by the State Board of Equalization and is based on the effective rate on conventional mortgages as determined by the Federal Home Loan Bank Board. The historical property tax component is 4 percent in the case of owner occupied single family dwellings; in all other cases the historical property tax component is 2 percent. City Council Report Mills Act March 17, 1997 Page 4 The amortization component is a percentage equal to the reciprocal of the remaining life of the improvements. The property taxes component is defined as the "percentage of the estimated total tax rate applicable to the property for the assessment year times the assessment ratio. During the term of the Mills Act contract, the assessed value of the property is recalculated each year based on changes in the factors used in the calculation. If the property appreciates significantly in value and is then sold, the tax savings will be increased because the Mills Act contract is automatically passed on to the new owner. Applicability - Other Communities and Tustin At least 43 California cities have implemented Mills Act programs. Those in Southern California include: Escondido, La Verne, Long Beach, Rancho Cucamonga, Redondo Beach, and San Diego, among others. Two Orange County cities, Brea and Orange, have Mills Act programs, but neither has an active contract at this time. The number of Mills Act contracts per city varies greatly. Some cities have only one contract in place, whereas Escondido has at least 26 contracts and San Diego has more than 40 contracts. In'most communities with Mills Act programs, the incentive has been targeted to residential.properties because other forms of financial assistance are usually made available to commercial properties that are not made available to residential properties. Properties in redevelopment areas sometimes are completely excluded from participating in a Mills Act program or are required to meet additional requirements imposed by the local government because of the impacts to the redevelopment agency. In Tustin, most of the historic properties in the Town Center Redevelopment Area are commercial properties. In the City of San Diego, historic commercial properties in redevelopment areas are only eligible for Mills Act contracts if the properties require rehabilitation, owners agree to rehabilitate the properties, Mills Act relief is necessary, and the owners have not received assistance from the Redevelopment Agency for maintenance of the properties. Because implementation of the Mills Act in redevelopment areas would directly impact the Redevelopment Agency, it is recommended that the Council not consider implementation of the Mills Act in redevelopment areas. If a Mills Act program were implemented in the City of Tustin, Ehe City Council'would have the discretion and flexibility to limit the City Council Report Mills Act March 17, 1997 Page 5 total number of Mills Act contracts or allow only certain properties to use the preservation incentive, such as residential properties, the most architecturally or historically significant properties (e.g. A-rated structures), or those properties located in the City's Cultural Resources District. Ail historic properties in Tustin are rated according to their architectural and historical importance. A-rated structures are most significant, B-rated structures are locally significant, C- rated structures' are significant as contributing structures and D- rated structures are least significant, but potentially contributing if restored. Properties could be prioritized for Mills Act contracts according to their potential for an increased rating. In other words, the Mills Act could be used as an incenSive to upgrade some of the "C" and "B" rated structures (than have a potential for upgrading) to a "B" or "A" rating. This use of the Mills Act on properties within Old Town would help to maintain the historical integrity of the entire Tustin Cultural Resources District. ANALYSIS There are 271 properties listed in the Tustin Historical Resources Survey. Properties that are assessed property taxes would be potentially eligible for Mills Act contracts. The number of properties, by rating, are as follows: Citywide- Total Residential Citywide- Non-residential Properties Within the District - Res/Nonres A: 32 17 15 14/10 B: 62 53 9 36/5 C: 137 116 21 58/9 D: 40 33 7 14/4 271 219 52 122/28 Impact on City Revenue If implemented, the Mills Act will have financial impacts on the City in the form of reduced property tax revenue. The extent of· the impacts is directly related to the number of Mills Act contracts and the assessed values of the properties. City Council Report Mills Act March 17, 1997 Page 6 The City of Tustin receives approximately 13 percent of basic property tax revenues for properties located outside of a redevelopment project area. The remaining 87 percent is shared by the County of Orange, Tustin Unified School District and special districts. Therefore, about 13 percent of the property tax savings realized by the owner of a Mills Act property would be lost as revenue to the City, with the remaining 87 percent lost as revenue to the other agencies which receive a share of the total property tax revenue. Staff has prepared the following scenarios to show the potential impact of Mills Act implementation on City property tax revenue. These examples consider all eligible A, B, and C-rated residential properties located outside of a redevelopment project area. Estimased City property tax losses are based on 1996-1997 assessed values. The first year property tax losses are relatively small because a significant percentage of the properties listed on the City's Historical Resources Survey were purchased more than twenty years ago and have relatively low assessed values. In these cases, there is usually no benefit for the owners to enter into Mills Act contracts. However, as these properties are sold, the assessed values will likely increase significantly and therefore, the property tax reductions for the property ©wners, and losses for the City, will also increase. Therefore, an estimate is included below that assumes resale at 1997 values. This is a worst case scenario because only a portion of the properties are likely to sell during any one year. 1. Scenario: . . Ail 16 A-rated residential properties obsain Mills Act contracts. City Revenue: First year property tax loss of about $1,100. Loss would increase to about $6,000 if all properties were resold at 1997 values. Scenario: Ail 53 B-rated residential properties.obtain Mills Act contracts. City Revenue: First year property tax loss of about $4,800. Loss would increase to about $14,000 if all properties were resold at 1997 values. Scenario: Ail 116 C-rated residential properties obtain Mills Act contracts. City Council Report Mills Act March 17, 1997 Page 7' City Revenue: First year property tax loss of about $5,600. Loss would increase to about $27,000 if all properties were resold at 1997 values.. It is important to note that these figures are rough estimates. There are many factors which affect the Mills Act calculation that cannot be determined at this time. For instance, assumptions had to be made regarding rental rates for similar properties in the area and maintenance and operation expenses. Also, reasonable estimates could not be made for properties that Contain more than one residence. It also should be noted that the number of properties eligible for Mills Act contracts could increase if the City of Tustin Historical Resources Survey were updated to include properties not previously considered historic. As the City's housing stock continues to age, more properties will reach 50 years in age and become eligible for listing in the survey and hence potentially eligible for Mills Act contracts. Other cities have analyzed the impact of Mills Act implementation on cities' property tax revenues. For example, the City of Escondido has determined that the cumulative annual tax loss to the city based on 26 contracts approved as of October, 1996 was $3,374. The City of Escondido receives 14 percent of property tax revenue, which is similar to the 13 percent in Tustin. Impact on City Staff Although the impact on City property tax revenue is considered the most significant negative impact on a city, the impact on staff and City Attorney services may be considerable, it is estimated that Mills Act administration would require approximately one fourth of a staff member's time (about $16,000/year) assuming five to ten contracts and approximately five hours of City Attorney services for the first contract and .5 hour for each additional contract. There would also be significant staff time required to introduce a Mills Act program to the public. Brochures and press releases, for example, would need to be prepared to educate.property owners about the Mills Act. Some cities with Mills Act programs do charge nominal processing fees for Mills Act contracts to recover a portion of the costs associated with contract administration. The City of San Diego, City Council Report Mills Act March 17, 1997 Page 8 for example, has a pro-rated filing fee, based on $100 per $100,000 of the property's assessed value. Other cities, however, charge no fees. The Mills Act allows local governments to collect a fee that does not exceed the reasonable cost of administering the program. Potential Benefits to the City In exchange for the property tax relief realized under Mills Act contracts, property owners must agree to maintain their properties for at least ten years in accordance with specific historic preservation standards and conditions. These standards may require the restoration or rehabilitation of properties according 5o the Secretary of the Interior's Standards for Rehabilitation. Other conditions regulating outdoor storage and the maintenance of landscaping, driveways, and fencing also may be included in the contracts. The preservation of individual historic properties through the implementation of the Mills Act in Old Town Tustin, particularly, would serve to maintain the historical integrity of the entire Tustin Cultural Resources District. The preservation of important resources and neighborhoods would have beneficial indirect effects on local businesses, economic stability and community pride. Therefore, the Mills Act is not only an incentive to owners to preserve their historic properties; it is also an incentive that can benefit the entire community. Should the Council wish to implement a Mills Act program in Tustin, it would be appropriate for the Council to direct staff to develop a resolution for the Council's consideration. This resolution should establish which of the properties listed on the City's Historical Resources Survey would be eligible to participate in the program. Scott Reekstin Associate Planner Elizabeth A. Binsack Director of Community Development Attachment: A - Hypothetical Example SR: ~millsact. scr -Attactunent A - Hypothetical Example Example: A single-family, owner-occupied residence. Current assessed valuation = $250,000 Current annual property taxes = ($250,000 x .01) = $2,500 Recalculation usinq Mills Act assessment method: Theoretical Gross Income = $1,200 per month x 12 = $14,400 Theoretical Expenses = $2,000 (insurance, repairs, utilities) Theoretical Net Income = $14,400 - $2,000 = $12,400 Capitalization Rate (varies each year) = .18 New assessed valuation = $12,400/.18 = $68,888 Annual property taxes with Mills Act = .01 x $68,888 = $688 Total Savings of $1,812 in annual property taxes. SR: ~ccreport \miiisact. att